Regional Formation and Development Studies

The system of local governments financing, which is used in Estonia is based on personal income tax and supports paid by the state. A system of that kind creates enormous inequality between the local governments. The continuing decrease of income taxes and the increase of tax-free minimum arises the role of state supports. Central government reduced essentially the part of income taxes assigned for local governments and supports in 2007–2010. That’s why the municipalities met a difficult economic situation. The greatest costs for municipalities is education. Government has taken a course to abolishing rural schools. As the analyses demonstrate the schools are enormous source of incomes for municipalities. Therefore the abolishment of schools would made the financial situation of municipalities worse even more. A special method wasn’t created for the analysis. The classical economic means – tables, indexes and marginal analyses were used.